Chávez's Growing Economic Trouble

As Venezuelan President Hugo Chávez tries to push through more reforms for his "socialist revolution," inflation and food shortages are rising concerns

Soaring prices and food shortages have taken a toll on Marianela Velasquez's holiday cheer this year. The 40-year-old, divorced mother of four goes to as many as four supermarkets a day in Venezuela's capital of Caracas, looking for staples such as milk, cooking oil, and eggs. Prices can be a shock, too. In the last month, prices for green peppers—a key ingredient in the traditional Christmas dish of hallaca—have more than doubled. "I don't know how I'll manage," says Velasquez.

The strength of the Venezuelan economy has long been a key factor in the popularity of President Hugo Chávez. With oil prices surging and government coffers bulging, Chávez has been able to offer generous social programs and price controls to keep basics affordable for all. But now the first cracks in the economic boom are starting to show. Inflation is surging, shortages of certain products are spreading, and the value of the bolivar, the local currency, is sliding, at least on the black market.

The troubles call into question the outlook for Chávez's self-proclaimed "socialist revolution." They also could have implications for Chávez as he tries to bounce back from his Dec. 2 defeat to rewrite the country's constitution (, 12/3/07) and make some of the controversial changes by other means. "It's going to be a bumpy ride in 2008," says Julia Buxton, a professor at the Britain's University of Bradford, who has written a book about Venezuelan politics. "There are going to be a lot of domestic economic variables that Chávez will have to confront."

Price Controls and Shortages

To be sure, the country's economy remains relatively strong. With oil prices still near all-time highs, growth for the first nine months of 2007 came in at 8.4%. But Venezuela's inflation rate is also ticking up, and it is now the highest in the region. With a 4% rise in November, inflation for the last 12 months hit 20.4%, up from 10.4% in May, 2006. Chávez had set a goal of reducing inflation to single digits this year.

Yet it is Chávez's efforts to fight inflation that have led to many of shortages. The government froze prices for more than 100 items in 2003 and hasn't raised most of the prices in four years. Producers now claim they can no longer make money at current prices, so they're shutting down production.

Many people are irate, largely blaming the companies that make the scarce goods. "Shortages exist because companies are keeping their products back, hoping to force the government to raise prices," says Heyla Ramirez, a 70-year-old grandmother, who supports Chávez. "They are just speculators."

But there are no easy answers to the problems. Finance Minister Rodrigo Cabezas said on Monday that the government is studying the possibility of easing price controls to combat shortages. But stocked shelves will come at a cost. The government recently removed price controls for sterilized milk, and the price of a liter surged more than 60%, to 3,600 bolivars. "Venezuela's economic model has created huge distortions," says Patrick Esteruelas, an analyst with Eurasia Group, a consulting firm in New York.

Mounting Concerns: Investment and Inflation

Foreign investment in the country has come to a virtual standstill. Investors are wary about putting their funds in the country, in part because of the expropriations Chávez is carrying out as part of his socialist program. In June, Chávez forced six multinational oil companies to hand over majority stakes in local ventures to the state oil company Petroleos de Venezuela (PDVSA) (BusinessWeek, 6/26/07). Chevron (CVX), BP (BP), France's Total (TOT), and Norway's Statoil (STO) complied and remained in the country, while ExxonMobil (XOM) and ConocoPhillips (COP) pulled out altogether.

The inflation surge is another concern. The black market rate of the dollar has soared to 5,500 bolivars, more than double the official exchange rate of 2,150. And companies are bracing for new labor regulations, including a 25% cut in the workweek that was part of Chávez's constitutional reform package that was rejected.

No…"for Now"

Although Velasquez worries about finding enough milk to feed her children, she also frets about Chávez and what he might try to do to overturn the defeat of his constitutional proposal. "No means no, and that is what the people said," says Velasquez. "But I am sure he won't give up."

Chávez has done little to allay those fears. After graciously accepting defeat in the early-morning hours of Dec. 3, the Venezuelan President has subsequently lashed out at opponents, while castigating supporters for not coming out to vote. He also promised to continue fighting for his reform package, which he said is necessary for his socialist revolution. Billboards with the words "for now" have sprouted up throughout Caracas, repeating Chávez's promise on the night of the election to abide by the vote results "for now."

Although smarting from the defeat, Chávez remains popular and powerful. His approval rating ranges between 50% and 60%, and he controls most of the country's institutions, including congress, the supreme court, and the military. Chávez has huge discretionary spending funds, too, boosted by high oil prices.

The President can also decree laws through next August, taking advantage of special powers granted earlier by the country's National Assembly, whose 167 members all nominally support Chávez. The Eurasia Group's Esteruelas says the President will likely use those powers to push through the less controversial aspects of his reform package, including extending social security and cutting the workweek.

Venezuelans on Their Guard

What remains to be seen is whether Chávez will seek to reintroduce the more controversial aspects of his reform to the country, especially changes that would allow him to run for re-election in 2012 when his current term ends.

"Chávez is a typical military man, who is authoritarian and who has no intention of stepping down," says Belkis Colmenares, a 27-year-old radiologist who voted against the reforms. "We can't trust him to honor the results of the vote."

Chávez is likely to wait several years before reintroducing controversial reforms, like the end of presidential term limits, if he does so at all. Citizens like Velasquez have to contend with the daily challenges of inflation and food shortages, but their greater concerns are over the years ahead. "I worry what will happen," says Velasquez. "I am sure he is thinking of other ways to change the constitution to get what he wants. We have to be on our guard."

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